U.S. stocks posted good gains in the second quarter of 2014 despite an uncertain geopolitical and economic environment. Downside concerns included violence in Crimea and Ukraine, slowing growth in China, sectarian strife in Iraq, and disappointing first-quarter U.S. economic data. Investor sentiment overcame these concerns amid signs of recovery from the first quarter's economic contraction, while improved corporate merger and acquisition activity was also supportive. Federal Reserve monetary policy remained broadly accommodative despite continued tapering of its asset purchase program. Large-cap stocks outperformed their mid- and small-cap peers. Growth shares outpaced value in the large-cap space but trailed in the mid- and small-cap arenas.
The Growth & Income Fund returned 3.97% in the quarter compared with 5.23% for the S&P 500 Index and 4.51% for the Lipper Large-Cap Core Funds Index. For the 12 months ended June 30, 2014, the fund returned 24.32% versus 24.61% for the S&P 500 Index and 23.38% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 24.32%, 17.21%, and 7.44% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.68% as of its fiscal year ended December 31, 2013.
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Energy, utilities, and materials were our top-performing sectors for the quarter. Information technology recorded more modest gains but still outperformed the broader market. Consumer discretionary and financials were our weakest sectors, with the latter posting a slight decline for the period. Energy shares rose as sectarian violence in Iraq drove prices higher and investors became more comfortable with the staying power of the global economic recovery. Over the long term, however, we expect increasing supply from North America to drive energy prices down, and we remain underweight to the sector. Industrials and business services is our largest sector overweight. We are concentrating on areas with durable growth prospects and favor companies with diversified operations and high gross margins that should thrive through a full market cycle.
The U.S. economy should continue to grow modestly in 2014, supported by broadly accommodative monetary policy, solid corporate fundamentals, improvements in the housing and labor markets, and decent consumer spending. Overall, we remain reasonably optimistic about the environment for equities. Given the disparity between recent returns and the relatively modest pace of earnings growth for many companies, however, equity valuations have become less attractive, and companies will need to deliver solid earnings and revenue growth to justify further gains. Fundamental research and careful stock selection will be essential as fundamental factors like earnings growth and cash flow become more important in assessing the health of companies and the economy.